The Meaning Of Price

A story I heard recently may be apocryphal, but it illustrates an important point. A company that made bearings offered two different classes of product—a cheaper bearing with a certain limited performance rating, as well as a more expensive bearing that could be run harder or longer. In light of changing manufacturing costs, the company reevaluated just how much it was paying to support these two different levels of product. It was paying a lot. In response, the company changed its production mix, making only the high-quality product from that point forward. Customers still had the choice of two different prices and two different performance guarantees, but what was invisible to the customer was that the same product would now be used to fill either order. For this product, the purchase price no longer conveyed any meaningful information about quality.

When it comes to the conclusions that a buyer can draw, I wonder whether the information content in the prices of manufactured goods is not lower today than ever before. Quality costs money; that hasn’t changed. But inefficiency costs money, too. In recent decades, various new technologies and new methods have appeared that improve and accelerate production, make designs cheaper to produce, and coordinate the process’s many steps to reduce the need for inventory. Different manufacturers have embraced these improvements to widely varying degrees. As a result—today more than ever—the difference in price that may signify a difference in quality might also signify a difference in production. The item with the higher price might be a product of equal or lesser quality that was manufactured through processes that are less refined.

Reflecting upon the meaning of price is appropriate right now, because shops are beginning to become consumers again. As business picks up, some shops that have long held off on purchases are eyeing new equipment once more.

We tend to applaud shops that spend heavily to improve their capabilities. And I think this is right, because success demands a certain courage to invest.

However, there is a complementary sort of courage that is also important—the willingness to question the comfort of a price. Sometimes it is necessary to look past the feeling that a higher price should equate to a more worthy product in cases where the return on that price is not clear. A difference in price can mean many different things. And the shop most likely to succeed is not the one that invests the most, but the one that invests the most wisely.